An Aussie small cap with plenty of upside

A stock that was trading at a discount to its earnings and valuation where we can see earnings growth over the forward period
Tim Binsted

NovaPort Capital

Monash IVF (ASX: MVF) has a market cap of just under $400 million and it's one of the three main providers at IVF services in Australia. During COVID, we saw a lot of change in behaviour from consumers, a lot of spending in different parts of the economy. IVF was no exception. We saw a boom in babies over that period with about a 30% growth in IVF cycles from 2021 over 2020. And while levels have moderated a bit from the peak, they're still strong and Monash's forward patient pipeline is very good.

We've also seen a change in industry structure throughout that period. We've had two private equity firms come into the market. One bought Virtus, the other listed competitor for Monash, and the other bought the low cost-competitor Adora out of Healius (ASX: HLS), and Genea an unlisted player in the market. We've now got a stable industry structure. The high pressure from low cost, which was pushing in and really damaging some margins around the edges from the low-cost full-service providers has now waned, and it's a much more stable market, better for pricing, and it's an environment where Monash has a chance to win market share.

A few years ago this trend was a bit against Monash, but now they've been incrementally growing their share. They're around 20%, and doctors who don't want to work under a private equity structure may well be motivated to move over to Monash's banners and take their business with them. So that's a very strong opportunity for them going forward. We've seen increasing government support for the sector, which is really important when a lot of the funding comes through Medicare, and we all know that out-of-pocket costs for IVF can be really expensive. So, you've got $2,000 of new funding from the good state of New South Wales, and we've also got the Vic liberals with that on their policy platform, and while they were unsuccessful, it's positive that it was part of their mix.

We've seen some additional funding for genetic testing coming through from the federal government for Medicare, which should flow into the pool of profits from the end of this year. We've got a growing Asia business, which is a secondary part of the story for Monash with a couple of clinics there, the main one in Kuala Lumpur, which has got a couple of million dollars of earnings recovery that should come from COVID interruptions not repeating in the forward period. And we've also got a similar recovery story for its ultrasound business, so there's some latent earnings potential that should come just from bad events not happening. And if you add that with the positive industry dynamics, the strong competitive background for Monash and the chance to win doctors, it's a really positive story for the small cap IVF sector for the next year and years afterwards.

At NovaPort Capital, we look for 50% upside over three years, and that usually comes from a combination of earnings growth and valuation support. So, this was a stock that was trading at a discount to its earnings and valuation where we could see earnings growth over the forward period, and we could see relative to market the possibility for multiple expansion, which brings the other leg to your investment upside and that should get you 50% over the three years.

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Tim Binsted
Senior Analyst
NovaPort Capital

Tim joined NovaPort Capital in October 2019 as an analyst. Before joining the NovaPort team, Tim worked at Adam Smith Asset Management for three years as an analyst covering Australian small and microcap equities. Prior to this, Tim was a...

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